Notes to Consolidated Financial Statements
1. Nature of Operations and Basis of Presentation
Atlas Financial Holdings, Inc. (“Atlas”, “We”, “us”, “our” or the “Company”) commenced operations on December 31, 2010. The primary business of Atlas focuses on a managing general agency (“MGA”) strategy, primarily through our wholly owned subsidiary, Anchor Group Management, Inc. (“AGMI”). AGMI focuses on a niche market orientation for the “light” commercial automobile sector. This sector includes taxi cabs, limousine, livery, full-time transportation network companies (“TNC”) drivers/operators, and other specialty commercial auto operators. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage.
Atlas’ business is carried out through its non-insurance company subsidiaries: AGMI, UBI Holdings Inc. (“UBI Holdings”) and UBI Holdings’ wholly-owned subsidiaries, optOn Digital IP Inc. (“OOIP”) and optOn Insurance Agency Inc. (“optOn” and together with OOIP and UBI Holdings, “UBI”).
Prior to a strategic transition, our core business was the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, through American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”) and Gateway Insurance Company (“Gateway” and together with American Country and American Service, the “ASI Pool Companies”) and Global Liberty Insurance Company of New York (“Global Liberty” and together with the ASI Pool Companies, our “Insurance Subsidiaries”), along with our wholly owned MGA, AGMI. The ASI Pool Companies were placed into rehabilitation under the statutory control of the Illinois Department of Insurance during the second half of 2019 and were subsequently placed into liquidation and have been deconsolidated from our consolidated financial statements as of October 1, 2019 as a result of these actions. Other regulatory actions were taken in certain states, including restriction, suspension, or revocation of certain state licenses and certificates of authority held by the ASI Pool Companies preceding and following the initiation of rehabilitation.
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty was held for sale and thus classified as a discontinued operation from October 1, 2019 through September 30, 2021. Global Liberty was placed into liquidation by the New York Department of Financial Services in October 2021 and, as a result, it has been deconsolidated from this report beginning October 2021.
Atlas’ ordinary voting common shares are listed on the OTC Markets system under the symbol “AFHIQ”.
Basis of Presentation
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Atlas and the entities it controls. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over operating and financial policies, are accounted for under the equity method unless we have elected the fair value option. All significant intercompany accounts and transactions have been eliminated.
Seasonality
Our insurance business is seasonal in nature. Our ability to generate commission income is also impacted by the timing of policy effective periods in the states in which we operate and products provided by our business partners. For example, January 1st and March 1st are common taxi cab renewal dates in Illinois and New York, respectively.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Atlas and the entities it controls. Subsidiaries are entities over which Atlas, directly or indirectly, has the power to govern the financial and operating policies in order to obtain the benefits from their activities, generally accompanying an equity shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to Atlas and would be deconsolidated from the date that control ceases. The operating results of subsidiaries acquired or disposed of during the year will be included in the consolidated statements of operations from the effective date of acquisition and up to the effective date of disposal, as appropriate. All
significant intercompany transactions and balances are eliminated in consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by Atlas.
The following are Atlas’ subsidiaries, all of which are 100% owned, either directly or indirectly, together with the jurisdiction of incorporation, that are included in consolidated financial statements:
•American Insurance Acquisition Inc. (Delaware)
•Anchor Group Management Inc. (New York)
•Anchor Holdings Group, Inc. (New York)
•Global Liberty Insurance Company of New York (New York), classified as a discontinued operation through September 30, 2021 and then deconsolidated effective October 1, 2021
•UBI Holdings Inc. (Delaware)
•optOn Digital IP Inc. (Delaware)
•optOn Insurance Agency Inc. (Delaware)
The following are Atlas’ subsidiaries, all of which Atlas retains the final equity claim against the estates, that are not included in consolidated financial statements, as management no longer has direct financial control over the estates of these entities:
•The Estate of American Country Insurance Company (Illinois)
•The Estate of American Service Insurance Company, Inc. (Illinois)
•The Estate of Gateway Insurance Company (Illinois)
•The Estate of Global Liberty (New York)
Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, and changes in estimates are recorded in the accounting period in which they are determined. Significant estimates in the accompanying financial statements include revenue recognition, evaluation of assets for impairment, valuation of financing instruments, and deferred tax asset valuation.
Financial Instruments
Financial instruments are recognized and unrecognized using trade date accounting, since that is the date Atlas contractually commits to the purchase or sale with the counter-party.
Investment Income and Realized Gains (Losses)
For securities other than mortgage-backed and asset-backed, Atlas utilizes the effective interest method to calculate the amortized cost of the financial asset and to amortize the premium or accrete the discount over the remaining life. The effective interest rate is the rate that discounts the estimated future cash flows through the expected life of the financial instrument. Mortgage-backed and asset-backed securities are valued using the retrospective adjustment method, which uses the effective interest method and includes anticipated prepayments. Interest income is reported net of amortization of premium and accretion of discount. Realized gains and losses on disposition of available-for-sale securities are based on the net proceeds and the adjusted cost of the securities sold using the specific identification method.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid securities with original maturities of 90 days or less.
Restricted Cash
In its capacity as an MGA, AGMI collects premiums from agents and insureds and after deducting its commissions and/or fees, remits the premiums to the respective insurance underwriters according to the settlement terms of their respective managing general agency agreements. The collected but not remitted amounts are reported as restricted cash in the accompanying consolidated statements of financial position with the related liability reported as premiums payable.
Premiums Receivable
Premiums receivable include premium balances due and uncollected and installment premiums not yet due from agents and insureds.
Atlas evaluates the collectability of accounts receivable based on a combination of factors. When aware of a specific customer’s inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer’s operating results or financial position, Atlas records a specific reserve for bad debt to reduce the related receivable to the amount Atlas reasonably believes is collectible. Atlas also records reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due and historical collection experience. Accounts are reviewed for potential write-off on a case-by-case basis. Accounts deemed uncollectible are written off, net of expected recoveries. If circumstances related to specific customers change, estimates of the recoverability of receivables could be further adjusted.
Income Taxes
Income tax expense includes all taxes based on taxable income or loss of Atlas and its subsidiaries, and is recognized in the statements of operations except to the extent that they relate to items recognized directly in other comprehensive income, in which case the income tax effect is also recognized in other comprehensive income or loss.
Deferred taxes are recognized based on the differences in the tax basis of assets, liabilities and items recognized directly in equity and the financial reporting basis of such items.
Deferred tax assets are recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized. Deferred tax assets and liabilities (“DTAs” and “DTLs”) are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment.
When considering the extent of the valuation allowance on Atlas’ DTAs, weight is given by management to both positive and negative evidence. U.S. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against DTAs. However, the strength and trend of earnings, as well as other relevant factors are considered.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas analyzes filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes.
Intangible Assets
Atlas recognized intangible assets as part of the acquisition of Anchor Holdings Group, Inc. The intangible assets are classified as either indefinite-lived or definite-lived depending on whether the useful lives can be identified. Atlas definite-lived intangible assets are amortized over their useful lives on a straight-line basis except for customer related intangibles, which are on an accelerated basis. Atlas definite-lived intangible assets consist of trade names and trademarks with useful lives of 15 years and customer relationships with useful lives of 10 years. The intangible assets are reviewed for impairment at least annually.
Property and Equipment
Buildings, office equipment and internal use software are stated at historical cost less depreciation and amortization. Subsequent costs are included in the asset’s carrying amount or capitalized as a separate asset only when it is probable that future economic benefits will be realized. Land is stated at historical cost.
Internal use software includes costs associated with the Company’s policy and claims system including costs to develop those systems. Costs incurred during the preliminary project stage are expensed as incurred; costs incurred for activities during the application development stage are capitalized; and costs incurred during the post-implementation/operation stage are expensed as incurred. Upon reaching the post-implementation/operation stage of the development of internal use software, the capitalized costs are amortized over the estimated useful life of the asset.
Depreciation on buildings and building improvements are provided on a straight-line basis over the estimated useful life of 33 years for buildings and 10 years for building improvements. Depreciation and amortization on equipment and internal use software is provided on a straight-line basis over the estimated useful lives which range from 5 years for vehicles, 5 years for furniture, 5 years for enterprise software and 3 years for all other software and computer equipment and the term of the lease for leased equipment.
Repairs and maintenance are recognized as an expense during the period incurred.
Revenue Recognition
Revenues from contracts with customers include both commission and fee income. The recognition and measurement of revenue is based on the assessments of individual contract terms. As an MGA, AGMI has contracts with various insurance carrier partners to write premiums for specific programs which determines AGMI’s commission income revenue. Each contract specifies what our performance obligations are as an MGA and what determines our commission income revenue, generally gross written premiums, net of cancellations and refunds, times an MSA commission percentage. Under these contracts there are a number of performance obligations; however, it is the bundle of these services and not a single obligation that results in the performance of the MGA under the contracts. The Company considers these performance obligations as a non-bifurcated bundle of services where the performance obligations are satisfied simultaneous to the point in time where AGMI issues a policy, or cancels a policy to an insured. The commission rate stated in the individual contract is the standalone selling price of these non-bifurcated services which is allocated to the service bundle and not to any individual obligation under the various contracts.
While Global Liberty remained consolidated in our financial statements, we recognized premium income on a pro rata basis over the terms of the respective insurance contracts.
Share-Based Compensation
Atlas has a share-based compensation plan that is described in Note 9, ‘Share-Based Compensation,’ to the Consolidated Financial Statements. Atlas uses the fair-value method of accounting to determine and account for equity settled transactions and to determine stock-based compensation for awards granted to employees and non-employees. Compensation expense is estimated based on the fair value of the award at the grant date and is recognized in net income over the requisite service period with a corresponding increase to additional paid in capital. The share-based compensation expense associated with awards that have graded vesting features and vest based on service conditions is calculated on a straight-line basis over the requisite service period for the entire award. Compensation expense recognized in connection with performance awards is based on the achievement of the specified performance and service conditions. During the recognition period compensation expense is accrued based on the performance condition that is probable of achievement. The final measure of compensation expense recognized over the requisite service period reflects the final performance outcome.
Operating Segments
Atlas operates in one business segment, the Managing General Agency segment.
Convertible Senior Secured Delayed-Draw Credit Agreement
The Company accounts for the issued Convertible Senior Secured Delayed-Draw Credit Agreement as separate liability and equity components. The carrying amount of the liability and equity components were calculated by utilizing the Black-Scholes modeling. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company has allocated issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are being amortized to expense over the respective term of the Credit Agreement, and issuance costs attributable to the equity components were netted with the respective equity component in additional paid-in capital.
To the extent that the Company receives conversion requests prior to the maturity of the Credit Agreement, a portion of the equity component is classified as temporary equity, which is measured as the difference between the principal and net carrying amount of the Credit Agreement requested for conversion. Upon settlement of the conversion requests, the difference between the fair value and the amortized book value of the liability component of the Notes requested for conversion is recorded as a gain or loss on early conversion. The fair value of the Credit Agreement is measured based on a similar liability that does not have an associated convertible feature based on the remaining term of the Credit Agreement, which requires significant judgment.
Out-of-period Adjustment
During the three months ended December 31, 2021, the Company recorded an out-of-period adjustment to correct premiums receivable and premiums payable related to the deconsolidation of the ASI Pool entities. The impact resulted in a $5.6 million gain on disposal of subsidiaries for the year ended December 31, 2021. Management concluded that the correction was not material to any current or previously issued consolidated financial statements.
Reclassifications
Certain accounts in the prior years’ consolidated financial statement have been reclassified for comparative purposes to conform to the current year’s presentation.
2. New Accounting Standards
Pertinent Accounting Standard Updates (“ASUs”) are issued from time to time by the FASB and are adopted by the Company as they become effective. All recently issued accounting pronouncements with effective dates prior to January 1, 2022 have been adopted by the Company.
All other recently issued pronouncements with effective dates after December 31, 2021 are not expected to have a material impact on the consolidated financial statements.
3. Intangible Assets
Indefinite-lived intangible assets are tested for impairment annually or when a triggering event occurs. As a result of the liquidation and deconsolidation of Global Liberty, the Company recorded an impairment loss of $930,000 on intangible assets for the year ended December 31, 2021. There were no intangible asset impairments recorded for the year ended December 31, 2020.
| | | | | | | | | | | | | | | | | |
| Intangible Assets by Major Asset Class |
| ($ in ‘000s) | Economic Useful Life | Gross Carrying Amount | Accumulated Amortization | Accumulated Impairment | Net |
|
| As of December 31, 2021 | | | | | |
| Trade name and trademark | 15 years | $ | 1,800 | | $ | 817 | | $ | — | | $ | 983 | |
| Customer relationship | 10 years | 2,700 | | 1,770 | | 930 | | — | |
| | $ | 4,500 | | $ | 2,587 | | $ | 930 | | $ | 983 | |
| | | | | |
| As of December 31, 2020 | |
| Trade name and trademark | 15 years | $ | 1,800 | | $ | 703 | | $ | — | | $ | 1,097 | |
| Customer relationship | 10 years | 2,700 | | 1,562 | | — | | 1,138 | |
| | $ | 4,500 | | $ | 2,265 | | $ | — | | $ | 2,235 | |
| | | | | |
Atlas recognized amortization expense of $322,000 and $390,000 for the years ended December 31, 2021 and 2020, respectively.
The following table presents the estimated future aggregate amortization expense for the years ending as follows:
| | | | | | | | |
| ($ in ‘000s) | | |
| 2022 | | $ | 120 | |
| 2023 | | 120 | |
| 2024 | | 120 | |
| 2025 | | 120 | |
| 2026 | | 120 | |
| Subsequent years | | 383 | |
| | $ | 983 | |
| | |
4. Loss From Continuing Operations per Share
| | | | | | | | | |
| Computations of Basic and Diluted Loss per Common Share from Continuing Operations | |
| ($ in ‘000s, except share and per share amounts) | Year ended December 31, | |
| 2021 | 2020 | |
| Basic | | | |
| Loss from continuing operations before income taxes | $ | (5,833) | | $ | (13,452) | | |
| Income tax expense (benefit) | — | | (484) | | |
| | | |
| | | |
| | | |
| Net loss attributable to common shareholders from continuing operations | $ | (5,833) | | $ | (12,968) | | |
| Basic weighted average common shares outstanding | 12,960,674 | 11,957,268 | | |
| Loss per common share basic from continuing operations | $ | (0.45) | | $ | (1.08) | | |
| | | |
| Diluted | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Basic weighted average common shares outstanding | 12,960,674 | | 11,957,268 | | |
| Dilutive potential ordinary shares: | | | |
| Dilutive stock options outstanding | — | | — | | |
| | | |
| Diluted weighted average common shares outstanding | 12,960,674 | | 11,957,268 | | |
| Loss per common share diluted from continuing operations | $ | (0.45) | | $ | (1.08) | | |
Common shares are defined as ordinary voting common shares, restricted voting common shares and participative RSUs. Earnings per common share diluted is computed by dividing net loss by the weighted average number of common shares outstanding for each period plus the incremental number of shares added as a result of converting dilutive potential ordinary voting common shares, calculated using the treasury stock method. Atlas’ potential dilutive ordinary voting common shares consists of outstanding stock options to purchase ordinary voting common shares and warrants to purchase 2,387,368 ordinary voting common shares of Atlas for $0.69 per share.
The outstanding principal balance of the Convertible Senior Secured Delayed-Draw Credit Agreement can be converted at any time into ordinary voting common shares, at the applicable Lender’s discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ discretion, be paid in cash or converted into ordinary shares at the same rate. No such conversion has taken place.
Atlas’s dilutive potential ordinary voting common shares consist of outstanding stock options to purchase ordinary voting common shares. The effects of these convertible instruments are excluded from the computation of earnings per common share diluted from continuing operations in periods in which the effect would be anti-dilutive. In 2021 and 2020, all exercisable stock options, warrants and Convertible Senior Secured Delayed-Draw Credit Agreement were deemed to be anti-dilutive.
5. Contracts with Customers
The revenue included as commission income for 2021 and 2020 totaled $5.9 million and $5.2 million, respectively.
The balance of receivables related to contracts with customers, which is recorded as part of premiums receivable on the Consolidated Statements of Financial Position as of December 31, 2021 and 2020:
| | | | | | | | | | | | |
| Components of Commission Receivables | |
| ($ in ‘000s) | Year ended December 31, | |
| 2021 | 2020 | |
| Commission receivable, beginning of year | $ | 2,577 | | $ | 1,428 | | |
| Commission revenue | 5,923 | | 5,195 | | |
| Net change in cash received | (5,949) | | (4,046) | | |
| Commission receivable, end of year | $ | 2,551 | | $ | 2,577 | | |
| | | | |
6. Income Taxes
| | | | | | | | | | | | | | |
| Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Continuing Operations |
| ($ in ‘000s) | Year ended December 31, |
| 2021 | 2020 |
| Amount | % | Amount | % |
| Provision for taxes at U.S. statutory marginal income tax rate | $ | (1,225) | | 21.0 | % | $ | (2,825) | | 21.0 | % |
| Provision for deferred tax assets deemed unrealizable (valuation allowance) | 2,446 | | (41.9) | | 1,744 | | (13.0) | |
| Nondeductible expenses | 3 | | (0.1) | | (3) | | — | |
| State tax (net of federal benefit) | — | | — | | (3) | | — | |
| Stock compensation | 7 | | (0.1) | | 630 | | (4.7) | |
| Gain from debt extinguishment | (1,231) | | 21.1 | | — | | — | |
| Tax rate differential | — | | — | | (42) | | 0.3 | |
| Other | — | | — | | 15 | | (0.1) | |
| Provision for income taxes for continuing operations | $ | — | | — | % | $ | (484) | | 3.5 | % |
| | | | |
| | | | | | | | | | | | | | |
| Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Discontinued Operations |
| ($ in ‘000s) | Year ended December 31, |
| 2021 | 2020 |
| Amount | % | Amount | % |
| Provision for taxes at U.S. statutory marginal income tax rate | $ | 35 | | 21.0 | % | $ | (60) | | 21.0 | % |
| Provision for deferred tax assets deemed unrealizable (valuation allowance) | (35) | | (21.0) | | (264) | | 92.9 | |
| Nondeductible expenses | — | | — | | 2 | | (0.7) | |
| Tax rate differential | — | | — | | (200) | | 70.4 | |
| Provision for income taxes for discontinued operations | $ | — | | — | % | $ | (522) | | 183.6 | % |
| | | | |
| | | | | | | | |
| Components of Income Tax Benefit - Continuing Operations |
| ($ in ‘000s) | Year ended December 31, |
| 2021 | 2020 |
| Current tax benefit | $ | — | | $ | (484) | |
| | |
| | | | | | | | |
| Components of Income Tax Benefit - Discontinued Operations |
| ($ in ‘000s) | Year ended December 31, |
| 2021 | 2020 |
| Current tax benefit | $ | — | | $ | (522) | |
| | |
During 2013 and 2019, due to shareholder activity, “triggering events” as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company’s net operating loss and other carryforwards generated prior to the “triggering events” will be subject to a yearly limitation as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company’s shares. Due to the mechanics of the Section 382 calculation, when there are multiple triggering events the Company’s losses will generally be limited based on the thresholds of the 2019 triggering event. The Company has established a valuation allowance against the NOLs that will expire unused as a result of the yearly limitation.
| | | | | | | | |
| Components of Deferred Income Tax Assets and Liabilities |
| ($ in ‘000s) | December 31, |
| 2021 | 2020 |
| Gross deferred tax assets: | | |
| Losses carried forward | $ | 6,657 | | $ | 16,408 | |
| Claims liabilities and unearned premium reserves | — | | 496 | |
| Investment in affiliates | 28,250 | | 23,870 | |
| Bad debts | 47 | | 168 | |
| Fixed assets | 437 | | — | |
| Stock compensation | 320 | | 279 | |
| Other | 670 | | 203 | |
| Valuation allowance | (35,894) | | (33,420) | |
| Total gross deferred tax assets | 487 | | 8,004 | |
| | |
| Gross deferred tax liabilities: | | |
| Deferred policy acquisition costs | — | | 134 | |
| Investments | — | | 122 | |
| Fixed assets | — | | 1,344 | |
| Intangible assets | 206 | | 469 | |
| Other | 281 | | 5,935 | |
| Total gross deferred tax liabilities | 487 | | 8,004 | |
| Net deferred tax assets | $ | — | | $ | — | |
| | |
| | | | | | | | |
| Net Operating Loss Carryforward as of December 31, 2021 by Expiry Date |
| ($ in ‘000s) | | |
| Year of Occurrence | Year of Expiration | Amount |
| 2011 | 2031 | $ | 1 | |
| 2012 | 2032 | 70 | |
| 2015 | 2035 | 1 | |
| 2017 | 2037 | 12,085 | |
| 2018 | Indefinite | 8,245 | |
| 2019 | Indefinite | 5,241 | |
| 2020 | Indefinite | 4,687 | |
| 2021 | Indefinite | 1,372 | |
| Total | | $ | 31,702 | |
| | |
Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which they can be utilized. When considering the extent of the valuation allowance on Atlas’ deferred tax assets, weight is given by management to both positive and negative evidence. U.S. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Based on Atlas’ cumulative loss in recent years and certain deferred tax assets subject to a yearly limitation under Section 382 which will likely result in expiration before utilization, Atlas has established a valuation allowance of $35.9 million and $33.4 million for its gross future deferred tax assets as of December 31, 2021 and 2020, respectively.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state income tax positions have been recorded. Atlas would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest expense or penalties in 2021 or 2020. Tax years 2015 and years thereafter are subject to examination by the Internal Revenue Service (“IRS”).
7. Commitments and Contingencies
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries.
Atlas is exposed to credit risk on balances receivable from insureds and agents. Credit exposure to any one individual insured is not material. The policies placed with risk-taking partners are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has procedures to monitor and minimize its exposure to delinquent agent balances, including, but not limited to, reviewing agent account statements, processing policy cancellations for non-payment and other collection efforts deemed appropriate. As a managing agent, our ability to generate commission revenue is pursuant to contractual agreements with risk-taking partners. Our objective is to maintain long-term relationships with these risk-taking partners. Such relationships are dependent upon market conditions, business results, and other factors which may be outside of our control.
8. Property and Equipment
| | | | | | | | |
Property and Equipment Held1 |
| ($ in ‘000s) | As of December 31, |
| 2021 | 2020 |
Buildings1 | $ | — | | $ | 7,425 | |
Land1 | — | | 1,840 | |
Building improvements1 | — | | 9,031 | |
| Leasehold improvements | 39 | | 193 | |
| Internal use software | 12,795 | | 12,795 | |
| Computer equipment | 1,842 | | 1,838 | |
| Furniture and other office equipment | 1,086 | | 1,121 | |
| Total | $ | 15,762 | | $ | 34,243 | |
| Accumulated depreciation | (13,259) | | (15,428) | |
| Total property and equipment, net | $ | 2,503 | | $ | 18,815 | |
| | |
1Held for sale.
Depreciation expense and amortization from continuing operations was $1.8 million and $3.2 million in 2021 and 2020, respectively.
During 2016, Atlas purchased a building and land for $9.3 million to serve as its new corporate headquarters to replace its former leased office space. Atlas’ Chicago area staff moved into this space in late October 2017 and occupies approximately 70,000 square feet in the building. An unrelated tenant occupies the remaining office space in the building, pursuant to a lease agreement with American Acquisition. Rental income related to this lease agreement was $477,000 and $462,000 in 2021 and 2020, respectively. Depreciation expense related to the building and its improvements was $284,000 and $1.1 million in 2021 and 2020, respectively. The decrease in depreciation expense for its corporate headquarters is a result of the held for sale status of the corporate headquarters.
On April 1, 2021, the Company transitioned the assets related to its corporate headquarters from long-lived assets as held and used to long-lived assets held for sale. The Company has engaged an independent third party that is actively marketing the sale of the corporate headquarters including the land, building, building improvements and contents including furniture and fixtures. The Company engaged an independent third party that performed a valuation of the corporate headquarters and determined the fair market value as $7.5 million. The valuation of the corporate headquarters resulted in a net realized loss totaling $7.0 million for the year ended December 31, 2021.
For the years ended December 31, 2021 and 2020, the Company capitalized $0 and $185,000, respectively, of costs incurred, consisting primarily of external consultants and internal labor costs incurred during the application development stage of the internal use software. Substantially all of the costs incurred during the period were part of the application development stage. For the years ended December 31, 2021 and 2020, there was $1.2 million and $1.4 million, respectively, of amortization expense recorded for projects in the post-implementation stage.
Net realized losses on the disposal and sales of equipment, other than the corporate headquarters, was $0 and $3,000 in 2021 and 2020, respectively.
9. Share-Based Compensation
On January 6, 2011, Atlas adopted a stock option plan (“Stock Option Plan”) in order to advance the interests of Atlas by providing incentives to eligible persons defined in the plan. In the second quarter of 2013, a new equity incentive plan (“Equity Incentive Plan”) was approved by the Company’s common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the preceding Stock Option Plan. The Equity Incentive Plan is a securities based compensation plan, pursuant to which Atlas may issue restricted stock grants for ordinary voting common shares, restricted stock, stock grants for ordinary voting common shares, stock options and other forms of equity incentives to eligible persons as part of their compensation. The Equity Incentive Plan is considered an amendment and restatement of the Stock Option Plan, although outstanding stock options issued pursuant to the Stock Option Plan will continue to be governed by the terms of the Stock Option Plan.
Stock Options
| | | | | | | | | | | | | | |
| Stock Option Activity |
| (prices in Canadian dollars designated with “C$” and U.S. dollars designated with “US$”) | Year ended December 31, |
| 2021 | 2020 |
| Number of Options | Weighted Average Exercise Price | Number of Options | Weighted Average Exercise Price |
| C$ Denominated: | | | | |
| Outstanding, beginning of period | — | | $ | — | | 27,195 | | C$6.00 | |
| Granted | — | | — | | — | | — | |
| Exercised | — | | — | | — | | — | |
| Canceled | — | | — | (27,195) | | C$6.00 | |
| Outstanding, end of period | — | | $ | — | | — | | C$— | |
| | | | |
| US$ Denominated: | | | | |
| Outstanding, beginning of period | 181,500 | | US$13.51 | 375,000 | | US$17.01 |
| Granted | 1,016,000 | | US$0.49 | — | | — | |
| Exercised | — | | — | | — | | — | |
| Canceled | — | | — | (193,500) | | US$18.73 |
| Outstanding, end of period | 1,197,500 | | US$2.63 | 181,500 | | US$13.51 |
| | | | |
| | | | | | | | | | | |
| Options Outstanding |
| As of December 31, 2021 |
| Grant Date | Expiration Date | Number Outstanding | Number Exercisable |
| March 6, 2014 | March 6, 2024 | 146,500 | | — | |
| March 12, 2015 | March 12, 2025 | 35,000 | | — | |
| April 22, 2021 | April 22, 2028 | 1,016,000 | | — | |
| Total | | 1,197,500 | | — | |
| | | |
There are no stock options that are exercisable as of December 31, 2021. The stock option grants outstanding have a weighted average remaining life of 5.72 years and have an intrinsic value of $0 as of December 31, 2021.
On March 12, 2015, the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted stock grants for ordinary voting common shares of the Company and (ii) 200,000 options to acquire ordinary voting common shares to the executive officers of the Company as part of the Company’s annual compensation process. The awards were made under the Company’s Equity Incentive Plan. The awards vest in five equal annual installments of 20%, provided that an installment shall not vest unless an annual performance target based on specific book value growth rates linked to return on equity goals is met. In the event the performance target is not met in any year, the 20% installment for such year shall not vest, but such non-vested installment shall carry forward and can become vested in future years (up to the fifth year from the date of grant), subject to achievement in a future year of the applicable performance target for such year. During 2020, 140,000 of the option awards were canceled as a result of not meeting the annual performance targets and an additional 53,500 options were canceled due to the departure of a former officer. During 2021 or 2020, no shares of either the restricted stock grants for ordinary voting
common shares or the options to acquire ordinary voting common shares vested, due to not meeting annual performance targets. The Monte-Carlo simulation model was used, for both the options and restricted stock grants for ordinary voting common shares, to estimate the fair value of compensation expense as a result of the performance based component of these grants. Utilizing the Monte-Carlo simulation model, the fair values were $1.5 million and $1.9 million for the options and restricted stock grants for ordinary voting common shares, respectively. This expense was amortized over the anticipated vesting period.
On April 22, 2021, the Company granted an aggregate of 1,016,000 options (“Options”) with an exercise price of $0.49 per common share of the Company to directors, managers, and executives pursuant to the Company’s Equity Incentive Plan. This exercise price is the average of the high bid and low asked prices on the date of the grant quoted on the OTC Bulletin Board Service. The Options granted to management will vest in three equal installments, with each installment vesting on the 1st, 2nd and 3rd anniversary of the date of the grant. The Options granted to independent directors vested immediately upon the date of the grant. The Options will expire on the seventh anniversary of the date of the grant. In the event of a change of control of the Company, or should a director’s or employee’s service with the Company be terminated other than for cause or voluntary resignation, any unvested Options will immediately vest. The estimated fair values of the Options are amortized to expense over the Options’ vesting period. The Company estimated the fair value of the Options at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
| | | | | |
| 2021 |
| Expected risk-free interest rate | 1.6 | % |
| Volatility | 180.8 | % |
| Expected life (in years) | 7.0 |
| |
On December 31, 2018, the Company awarded restricted stock unit grants for ordinary voting common shares of the Company to its external directors pursuant to a director equity award agreement dated December 31, 2018. The awards, which were approved by the Company’s Board of Directors in March 2018, were valued at $40,000 per external director (“Aggregate Award”) and were made under the Company’s Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A) the Aggregate Award by (B) the closing price of a Company ordinary voting common share at the close of market on April 4, 2018, which was $10.50 per share. For new directors, the Aggregate Award is proportionate to the director’s start date and priced as of that same day. During 2018, the Company awarded 17,524 RSU grants having an aggregate grant date fair value of $179,000. As of December 31, 2021, all of the RSU grants have vested.
Restricted Shares
| | | | | | | | | | | | | | |
| Restricted Stock Grants for Ordinary Voting Common Shares and Restricted Share Unit Activity |
| Year ended December 31, |
| 2021 | 2020 |
| Number of Shares | Weighted Average Fair Value at Grant Date | Number of Shares | Weighted Average Fair Value at Grant Date |
| Non-vested, beginning of period | 3,301 | | $ | 10.22 | | 171,682 | | $ | 17.46 | |
| Granted | — | | — | | — | | — | |
| Vested | (3,301) | | 0.12 | | (8,381) | | 10.22 | |
| Canceled | — | | — | | (160,000) | | 9.62 | |
| Non-vested, end of period | — | | $ | — | | 3,301 | | $ | 10.22 | |
| | | | |
During 2020, 140,000 ordinary voting restricted common shares were canceled as a result of not meeting annual performance targets and an additional 20,000 restricted common shares were canceled due to the departure of a former officer. Also during 2020, 2,540 restricted share units vested related to the retirement of two former directors.
In accordance with ASC 718 (Stock-Based Compensation), Atlas has recognized share-based compensation expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Share-based compensation expense is a component of other underwriting expenses on the statements of operations. Atlas recognized share-based compensation expense of $238,000 and $292,000 in the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, there was no unrecognized total compensation expense related to any restricted stock and restricted stock unit grants for ordinary voting common shares.
10. Other Employee Benefit Plans
Defined Contribution Plan
Atlas has a defined contribution 401(k) plan covering all qualified employees of Atlas and its subsidiaries. Contributions to this plan are limited based on IRS guidelines. Atlas matches 100% of the employee contribution up to 2.5% of annual earnings, plus 50% of additional contributions up to 2.5% of annual earnings, for a total maximum expense of 3.75% of annual earnings per participant. Atlas’ matching contributions are discretionary. Employees are 100% vested in their own contributions and vest in Atlas contributions based on years of service equally over 5 years with 100% vested after 5 years. Company contributions were $0 and $77,000 and in 2021 and 2020, respectively. The matching portion of this plan was suspended until further notice during the third quarter of 2020.
Employee Stock Purchase Plan
The Atlas Employee Stock Purchase Plan (“ESPP”) encourages employee interest in the operation, growth and development of Atlas and provides an additional investment opportunity to employees. Full time and permanent part time employees working more than 30 hours per week are allowed to invest up to 7.5% of adjusted salary in Atlas ordinary voting common shares. Atlas matches 100% of the employee contribution up to 2.5% of annual earnings, plus 50% of additional contributions up to 5% of annual earnings, for a total maximum expense of 5% of annual earnings per participant. Atlas’ matching contributions are discretionary. Atlas also pays all administrative costs related to this plan. In 2021 and 2020, Atlas’ costs incurred related to the matching portion of the ESPP were $0 and $21,000, respectively. Share purchases pursuant to this plan are made in the open market. The matching portion of this plan was suspended until further notice during the third quarter of 2020.
11. Share Capital, Warrants and Mezzanine Equity
Share Capital
| | | | | | | | | | | | | | | | | | | | | | | |
| Share Capital Activity | | |
| | As of December 31, |
| | 2021 | 2020 |
| Shares Authorized1 | Shares Issued | Shares Outstanding | Amount ($ in ‘000s) | Shares Issued | Shares Outstanding | Amount ($ in ‘000s) |
| | | | | | | |
| | | | | | | |
| Ordinary voting common shares | 800,000,001 | | 15,052,839 | | 14,797,334 | | $ | 45 | | 12,248,798 | | 11,993,293 | | $ | 37 | |
| Restricted voting common shares | 33,333,334 | | — | | — | | — | | — | | — | | — | |
| Total common shares | 833,333,335 | | 15,052,839 | | 14,797,334 | | $ | 45 | | 12,248,798 | | 11,993,293 | | $ | 37 | |
| | | | | | | |
1 Shares authorized increased from 266,666,667 to 800,000,001 effective July 12, 2021.
There were 0 and 3,301 non-vested RSUs as of December 31, 2021 and 2020, respectively. These RSUs are participative and are included in the computations of earnings per common share and book value per common share for these periods.
During 2021, the Company issued 2,804,041 ordinary voting common shares of which 2,750,000 ordinary voting common shares were issued in connection with the Credit Agreement, 50,740 ordinary voting common shares were issued under the near term incentive program, and 3,301 ordinary voting common shares were issued as a result of the vesting of RSUs. In March 2022, the Company issued an additional 2,500,000 voting common shares in connection with the Credit Agreement.
During 2020, the Company issued 210,481 ordinary voting common shares of which 202,100 ordinary voting common shares were issued under the near term incentive program while 8,381 ordinary voting common shares were issued as a result of the vesting of RSUs. Also, during the year ended December 31, 2020, 140,000 ordinary voting restricted common shares were canceled due to not meeting performance targets, and 20,000 ordinary voting restricted common shares were canceled due to the departure of a former officer.
Warrants
The Schedule 13G/A filed by American Financial Group, Inc., a parent holding company, on January 20, 2022 states that as of December 31, 2021 it has sole voting power to vote 2,387,368 ordinary voting common shares and sole power to dispose of 2,387,368 ordinary voting common shares. These shares are represented by warrants to purchase 2,387,368 ordinary voting common shares until June 10, 2024, under a Warrant Agreement dated June 10, 2019 (the “Warrant Agreement”), at an initial exercise price of $0.69 per share, with both the number of ordinary voting common shares subject to the Warrant Agreement and the exercise price subject to adjustment as set forth in the Warrant Agreement.
Atlas did not declare or pay any dividends to its common shareholders during 2021 or 2020.
Convertible Senior Secured Delayed-Draw Credit Agreement
The outstanding principal balance of the Term Loans can be converted at any time into ordinary voting common shares, at the applicable Lender’s discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ discretion, be paid in cash or converted into ordinary shares at the same rate. No such conversion has taken place.
Mezzanine Equity
There were no preferred shares outstanding as of December 31, 2021 and 2020.
12. Leases
We currently lease real estate space and certain equipment under non-cancelable operating lease agreements. Leases with an initial term of 12 months or less, which are immaterial to the Company, are not recorded in the consolidated statement of financial position. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases to lease payments based on changes in index rates or usage, are not recorded in the consolidated statements of financial position.
Certain agreements include an option to extend or renew the lease term at our option. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, the Company uses an estimate of its incremental borrowing rate. The Company did not have any contracts accounted for as finance leases as of December 31, 2021 or 2020.
| | | | | | | | |
| Lease Expense |
| | |
| ($ in ‘000s) | 2021 | 2020 |
| Operating leases | $ | 676 | | $ | 752 | |
| Variable lease cost | 203 | | 358 | |
| Total | $ | 879 | | $ | 1,110 | |
| | |
| | | | | | | | |
| Other Operating Lease Information |
| | |
| ($ in ‘000s) | 2021 | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows | $ | 714 | | $ | 1,109 | |
| Right-of-use assets obtained in exchange for new lease liabilities | — | | — | |
| Total | $ | 714 | | $ | 1,109 | |
| | |
The following table presents the undiscounted contractual maturities of the Company’s operating lease liability at December 31, 2021:
| | | | | | | | |
| Contractual Operating Lease Liabilities |
| ($ in ‘000s) | | |
| 2022 | | $ | 179 | |
| 2023 | | 23 | |
| Total lease payments | | $ | 202 | |
| Impact of discounting | | 22 | |
| Operating lease liability | | $ | 224 | |
| | |
| Supplemental Balance Sheet Disclosures |
| ($ in ‘000s) | | |
| Lease Component | Balance Sheet Classification | As of December 31, 2021 |
| Lease right-of-use asset | Right-of-use asset | $ | 237 | |
| | |
| Weighted-average remaining lease term | | 0.5 years |
| Weighted-average discount rate | | 4.1 | % |
| | |
13. Related Party Transactions
A member of the Company’s board of directors is a member of the administrative agent for the Credit Agreement as discussed further in Note 14.
14. Notes Payable
Senior Unsecured Notes
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately $23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses. The Notes were issued under an indenture and supplemental indenture that contain covenants that, among other things, limit: (i) the ability of Atlas to merge or consolidate, or lease, sell, assign or transfer all or substantially all of its assets; (ii) the ability of Atlas to sell or otherwise dispose of the equity securities of certain of its subsidiaries; (iii) the ability of certain of Atlas’ subsidiaries to issue equity securities; (iv) the ability of Atlas to permit certain of its subsidiaries to merge or consolidate, or lease, sell, assign or transfer all or substantially all of their respective assets; and (v) the ability of Atlas and its subsidiaries to incur debt secured by equity securities of certain of its subsidiaries.
Interest on the Notes is payable quarterly on each January 26, April 26, July 26 and October 26. Pursuant to the supplemental indenture, Atlas may, at its option, beginning with the interest payment date of April 26, 2020, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the date of redemption. The Notes rank senior in right of payment to any of Atlas’ existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the senior unsecured notes. The Notes rank equally in right of payment to all of Atlas’ existing and future senior indebtedness, but are effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the Notes are structurally subordinated to the indebtedness and other obligations of Atlas’ subsidiaries.
On August 31, 2021, the Company entered into the RSA with holders of approximately 48% of the aggregate principal amount of the Notes, and subsequently holder of approximately an additional 9.0% of the aggregate principal amount of the Notes acceded to the RSA for a total of approximately 57% (collectively, the “Supporting Noteholders”). Effective as of February 22, 2022 the Company entered into an amendment of the RSA with the requisite majority of Supporting Noteholders to extend the date by which the Note Restructuring must be competed (so-called the Scheme Longstop Date under the RSA) to April 15, 2022. The RSA memorializes the agreed-upon terms for the Note Restructuring. The RSA contemplates that the Note Restructuring will be effectuated through (i) the Scheme and (ii) a recognition proceeding with respect to the Scheme pursuant to chapter 15 of title 11 of the United States Code. Under the terms of the RSA, as amended, the Note Restructuring is expected to be completed by April 15, 2022, resulting in a five-year extension of the stated maturity through April 26, 2027 and other agreed modifications. The Company expects that the contemplated restructuring will enable it to satisfy its obligations under New Notes and create value for stakeholders.
Each Supporting Noteholder has been fully supportive of the proposed Note Restructuring and has agreed, as reflected in the RSA, to, among other things, (i) work in good faith with the Company and its advisors to implement the Note Restructuring as soon as possible in a manner consistent with the terms of the RSA; (ii) support the Note Restructuring and vote and exercise any powers or rights available to it in favor of any matter requiring approval to the extent necessary to implement the Note Restructuring; (iii) not take, direct, encourage, assist or support (or procure that any other person takes, directs, encourages, assist or supports) any action which would, or would reasonably be expected to, breach or be inconsistent with the RSA or the Note Restructuring, or delay, impede, or prevent the implementation or consummation thereof; (iv) oppose any party or person from taking any Restricted Actions (as defined in the RSA); (v) negotiate in good faith and use commercially reasonable efforts to execute and implement the Definitive Restructuring Documents (as defined in and consistent with the RSA) to which it is required to be a party and coordinate its activities with the other parties (to the extent practicable and subject to the terms of the RSA) in respect of all matters concerning the implementation and consummation of the RSA; and (vi) cooperate with and assist the Company in obtaining additional support for the Note Restructuring from the Company’s stakeholders. The RSA allows other holders of the Notes to accede to the RSA and become Supporting Noteholders.
On January 4, 2022, the Company initiated the Cayman Proceeding. Pursuant to the summons for directions, the Company sought the Convening Order for the convening of the Scheme Meeting. At the Scheme Meeting, holders of 91.83% of the Notes in number and 99.34% par amount of those voting voted in favor of the Scheme and, on February 25, 2022, the Cayman Court sanctioned and approved the Scheme by entry of the Sanction Order.
In furtherance of the Cayman Proceeding and in connection with the Note Restructuring, on March 4, 2022, the Company filed the Recognition Petition, seeking that the Bankruptcy Court enter the Recognition and Enforcement Order. On March 4, 2022, the Bankruptcy Court entered an order, which, among other things, scheduled the Recognition Hearing. The Recognition Hearing was held on March 30, 2022, and, on the same day, the Bankruptcy Court entered the final and non-appealable Recognition and Enforcement Order, recognizing the Cayman Proceeding as the foreign main proceeding and enforcing the Scheme within the territorial jurisdiction of the United States, among other relief. Among other things, the Recognition and Enforcement Order provides that, pursuant to section 1145 of the Bankruptcy Code, once issued, the New Notes will be exempt from registration under Section 5 of the Securities Act, and any applicable state and local securities laws and freely transferable, subject to certain limitations under section 1145(b) of the Bankruptcy Code with respect to any New Notes issued to “underwriters” as defined in section 2(a)(11) of the Securities Act. The procurement of the Recognition and Enforcement Order was the last in-court step in the Note Restructuring. The Recognition and Enforcement Order is effective immediately and enforceable upon entry, authorizing the Company take any action to implement and effectuate the Note Restructuring, including finalization of ancillary documents, among other things, in an effort to proceed toward closing the Note Restructuring in accordance with the Scheme and the RSA.
Pursuant to the terms of the Note Restructuring, the Notes will be canceled and the New Notes will be issued in exchange on or around April 15, 2022. The accrued but unpaid interest on the Notes as of the date the New Notes are issued will be capitalized and added onto the principal of the New Notes. The New Notes will be issued by the Company pursuant to a second supplemental indenture and will have a maturity date of April 27, 2027. The New Notes will be unsecured with an interest rate of 6.625% per annum, if paid in cash, and 7.25% per annum, if paid in kind, with a paid-in-kind option allowing the Company to pay interest in kind for up to two years from the date the New Notes are issued. Additionally, the Company will have the option to redeem the New Notes after three years at the principal amount to be redeemed as well as the option to redeem New Notes in an amount related to capitalized PIK interest on the New Notes, plus any accrued but unpaid interest, with no penalty. The Company intends to utilize the extended maturity of the New Notes to execute on its technology and analytics driven MGA strategy, with the objective of creating value for all stakeholders. The New Notes will to be issued in reliance on the exemption to registration provided by section 1145 of the Bankruptcy Code, except with respect to those New Notes issued to an “underwriter” as defined in section 2(a)(11) of the Securities Act under section 1145(b) of the Bankruptcy Code that will be subject to certain restrictions upon resale, and the authorization of the Bankruptcy Court pursuant to the Recognition and Enforcement Order; however, the Company intends to use its best efforts to seek registration of the New Notes following the Note Restructuring.
Mortgage
On November 10, 2016, American Acquisition entered into a ten-year 5.0% fixed rate mortgage agreement with the Insurance Subsidiaries totaling $10.7 million with principal and interest payments due monthly. The mortgage is secured by the Company’s headquarters and was previously eliminated in consolidation. The mortgage balances payable as of December 31, 2021 and 2020 were $8.0 million and $6.9 million, respectively.
Paycheck Protection Program Loans
On May 1, 2020, American Acquisition entered into a PPP Note with respect to a loan of $4,600,500 (the "First PPP Loan") from Fifth Third. The First PPP Loan was obtained pursuant to the Paycheck Protection Program of the CARES Act administered by the SBA. The First PPP Loan had a maturity date of May 1, 2022 and interest at a rate of 1.0% per annum. On June 14, 2021, American Acquisition received notification from the SBA that the First PPP Loan principal and related interest has been forgiven.
On February 7, 2021, American Acquisition entered into the Second PPP Loan from Fifth Third. The Second PPP Loan was obtained pursuant to the SBA’s Paycheck Protection Program Second Draw Loans under the SB Act and is subject to the terms and conditions of the SB Act, the CARES Act and related legislation and regulations. The Company was eligible for the Second PPP Loan because its equity securities were not a National Markets System stock traded on a national securities exchange as defined by Section 6 of the Securities Exchange Act. The Second PPP Loan had a maturity date of February 7, 2026 and interest at a rate of 1.0% per annum. On December 10, 2021, American Acquisition received notification from the SBA that the Second PPP Loan principal and related interest has been forgiven.
Credit Agreement
On September 1, 2021, the Company and certain Borrowers, entered into the Credit Agreement, with the Agent and the Lenders, pursuant to which the Lenders made available to the Borrowers an aggregate principal amount of up to $3,000,000 Term Loans. The Credit Agreement provides for an initial advance of $2 million in Term Loans and up to $1 million of additional Delayed Draws within 18 months of closing, in each case, subject to the satisfaction of waiver of certain funding conditions and the other terms and conditions set forth in the Credit Agreement. The Borrowers may use the proceeds of the Term Loans for payments of certain agreed upon permitted expenditures, which include expenses expected to be incurred in connection with the Note Restructuring. Interest will accrue on the funded Term Loans at 12% per annum and may be paid, at the Borrowers’ option, in cash or in kind; provided, that upon the occurrence and during the continuance of an event of default, the interest rate will be increased to 14% per annum and will be payable only in cash. The term of the term loan facility is 24 months. In October 2021, and January 2022, the Lenders advanced an aggregate of $2 million of the Term Loans and, in March 2022, the Lenders advanced $1 million of delayed draws under the Term Loans, in each case despite the fact that not all of the funding conditions had been met.
As a set-up fee for the term loan facility, 2,750,000 ordinary voting common shares of the Company were issued to the Lenders upon execution of the agreement, and an additional 2,500,000 ordinary voting common shares were issued to the Lenders in March 2022, in connection with the Delayed Draws. The outstanding principal balance of the Term Loans can be converted at any time into ordinary voting common shares, at the applicable Lender’s discretion, at a rate of $0.35 per share, except that paid-in-kind interest included in the amount presented by a Lender for conversion may, at the Borrowers’ discretion, be paid in cash or converted into ordinary shares at the same rate.
Under the Credit Agreement, the Borrowers have the option at any time to prepay the Term Loans in whole or in part subject to the payment of certain yield protection obligations. The Lenders have the right to demand prepayment, along with payment of certain yield protection obligations, upon the occurrence of an event of default, change of control, sale of certain assets of the Borrowers, a casualty event, eminent domain, or condemnation, in each case, subject to negotiated limitations.
The Credit Agreement requires the satisfaction or waiver of certain funding conditions and that the Borrower comply with customary affirmative and negative covenants, including covenants governing and restricting indebtedness, liens, investments, sales of assets, distributions, and fundamental changes in the Borrowers’ organizational structure and line of business and maintaining certain levels of liquidity. The obligation of the Lenders to make any of the Term Loans is conditioned upon the grant to the Agent, on behalf of the Lenders, of a first priority perfected security interest in collateral consisting of substantially all of the assets of the Borrowers to secure the payment in full of the Term Loans and all other obligations under the Credit Agreement and related loan documentation. The collateral will include pledges of the equity of the Company’s direct and indirect subsidiaries American Acquisition, AGMI, Anchor Holdings Group, Inc., and UBI. Upon payment in full of the Term Loans, the Company will have no further obligations to the Agent and the Lenders under the Credit Agreement and other related loan documentation other than the obligation to register the ordinary shares issued pursuant to the Credit Agreement, and the security interests granted by the Borrowers in favor of the Agent, on behalf of the Lenders, will terminate.
For year end 2021, Management engaged an independent third-party valuation firm which determined the fair value of the Credit Agreement conversion option using Black-Scholes modeling. The fair value of the liability portion was determined to be $367,000 and was deducted from the $500,000 initial draw amount. The balance, or $133,000, was allocated to equity. The equity component of the Credit Agreement will not be remeasured as long as it continues to meet the conditions for equity classification.
The Company recorded a non-cash set-up fee related to the Credit Agreement totaling $935,000, which was the fair value of the shares issued for the Credit Agreement. As a result of not drawing against the Credit Agreement during Q3 2021, this non-cash set-up fee was recorded as an asset in the Company’s consolidated statements of financial position during Q3 2021 and was being amortized on a straight-line basis over the contractual term of the access period. On October 2, 2021, an initial $500,000 was drawn against the Credit Agreement, and, as a result a portion of the non-cash set-up fee, or $165,000, was reclassified from the asset to a liability as debt discount and $59,000 of the non-cash set-up fee was allocated to equity. The debt discount and the amount allocated to equity are amortized to interest expense over the term of the Credit Agreement using the straight line method.
| | | | | |
| Liability and Equity Components of Credit Agreement |
| ($ in ‘000s) | As of December 31, 2021 |
| Liability component: | |
| Principal amount | $ | 367 | |
| Unamortized debt discount | (143) | |
| Net carrying amount | $ | 224 | |
| |
| Carrying amount of equity component | $ | 81 | |
| |
During the first quarter of 2022, the Lenders advanced the remaining $1.5 million and $1.0 million of additional draw amounts.
Interest Expense
Interest expense on notes payable was $2.2 million and $2.3 million in 2021 and 2020, respectively.
| | | | | | | | |
| Notes Payable Outstanding |
| ($ in ‘000s) | As of December 31, |
| 2021 | 2020 |
6.625% Senior Unsecured Notes due April 26, 2022 | $ | 25,000 | | $ | 25,000 | |
1.0% PPP Loan due May 1, 2022 | — | | 4,601 | |
12.0% Credit Agreement, net of discount, due August 31, 2023 | 224 | | — | |
5.0% Mortgage due November 10, 2026 | 7,950 | | 6,863 | |
| Total outstanding borrowings | 33,174 | | 36,464 | |
| Unamortized issuance costs | (72) | | (296) | |
| Total notes payable | $ | 33,102 | | $ | 36,168 | |
| | |
15. Deconsolidation and Discontinued Operations
Deconsolidation
As part of the deconsolidation of the ASI Pool Companies during 2019, notes receivable from the estates of the ASI Pool Companies with outstanding principal and accrued interest balances of $18.0 million are now presented on the Consolidated Statements of Financial Position. On May 1, 2015, American Acquisition entered into subordinated surplus debentures (“Surplus Notes”) with the ASI Pool Companies that had a maturity date of April 30, 2020 carrying a variable interest equal to the corporate base rate as reported by the largest bank (measured in assets) with its head office located in Chicago, Illinois, in effect on the first business day of each month for the term of the Surplus Notes plus two percent per annum on the unpaid principal balance with a maximum variable interest rate for any month not to exceed the initial rate for the Surplus Notes by more than ten percent per annum. These Surplus Notes are subject to various terms and conditions as set forth by the Illinois Department of Insurance and require prior written approval for the payment of interest and/or the reduction in principal. These Surplus Notes could be used at some point to offset future amounts payable related to income tax settlements and various other intercompany settlements to the estates of the ASI Pool Companies.
Effective October 1, 2021, Atlas no longer has statutory responsibility or authority over the financial activities of Global Liberty while still maintaining their indirect ownership of Global Liberty. The Company recognized a gain of $126,000 relating to the deconsolidation for the year ended December 31, 2021. The financial results of Global Liberty are included in the consolidated statements of operations as a discontinued operation through the October 1, 2021 disposal date. There was no re-measurement of any retained interest since no future value was assigned to Global Liberty as a result of the liquidation.
Discontinued Operations
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty was held for sale and thus classified as a discontinued operation until October 2021 and the results of Global Liberty’s operations are reported separately for all periods presented. Global Liberty was not sold within the one year guidance as set forth by ASC 205-20-45-1E(d) to continue classifying Global Liberty as a discontinued operation. However, due to the confluence of events and circumstances beyond the Company’s control, ASC 205-20-45-1G(c) provides for an exception to the one year guidance which the Company believes fits its situation. As a result of the Company applying the exception guidance, Global Liberty remained as a discontinued operation through September 30, 2021. Global Liberty was placed into liquidation by the New York Department of Financial Services in October 2021 and, as a result, it has been deconsolidated from this reporting beginning October 2021.
Summary financial information for Global Liberty included in income from discontinued operations, net of tax in the consolidated statements of operations for the years ended December 31, 2021 and 2020 is presented below:
| | | | | | | | |
| Income From Discontinued Operations |
| ($ in ‘000s) | Period through | Year ended |
| September 30, | December 31, |
| 2021 | 2020 |
| Net premiums earned | $ | 7,765 | | $ | 13,908 | |
| Net investment loss | (106) | | (102) | |
| Net realized gains (losses) | 155 | | (1,411) | |
| Other income | 7 | | — | |
| Total revenue | 7,821 | | 12,395 | |
| Net claims incurred | 5,980 | | 689 | |
| Acquisition costs | (280) | | 6,875 | |
| Other underwriting expenses | 1,956 | | 5,117 | |
| Interest income | — | | (2) | |
| Total expenses | 7,656 | | 12,679 | |
| Income (loss) from operations before income taxes | 165 | | (284) | |
| Income tax benefit | — | | (522) | |
| Net income | $ | 165 | | $ | 238 | |
| | |
| Statements of Comprehensive Income (Loss) |
| Net income | $ | 165 | | $ | 238 | |
| | |
| Other comprehensive (loss) income: | | |
| Changes in net unrealized investment gains | (21) | | 161 | |
| Reclassification to net (loss) | (175) | | (155) | |
| | |
| Other comprehensive (loss) income | (196) | | 6 | |
| Total comprehensive (loss) income | $ | (31) | | $ | 244 | |
| | |
The assets and liabilities of Global Liberty are presented as held for sale in the consolidated statements of financial position at December 31, 2020, however, due to the deconsolidation as of October 1, 2021, Global Liberty’s assets and liabilities will no longer be included in the consolidated financial statements:
| | | | | |
| ($ in ‘000s) | |
| December 31, 2020 |
| Assets | |
| Investments | |
Fixed income securities, available for sale, at fair value (amortized cost $0 and $4,315) | $ | 4,544 | |
| |
| Other investments | 1,319 | |
| Total investments | 5,863 | |
| Cash and cash equivalents | 3,029 | |
| Accrued investment income | 29 | |
| |
| Reinsurance recoverables on amounts paid | 581 | |
| Reinsurance recoverables on amounts unpaid | 31,958 | |
| Prepaid reinsurance premiums | 9,739 | |
| Deferred policy acquisition costs | 637 | |
| |
| Other assets | 2,049 | |
| Total assets | $ | 53,885 | |
| |
| Liabilities | |
| Claims liabilities | $ | 38,499 | |
| Unearned premium reserves | 14,545 | |
| Due to reinsurers | 10 | |
| Other liabilities and accrued expenses | 7,353 | |
| Total liabilities | $ | 60,407 | |
| |
16. Going Concern
Under Accounting Standards Codification (“ASC”) 205-40 Going Concern, we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet our future financial obligations as they become due within one year after the date that the consolidated financial statements are issued. As required by this standard, our evaluation shall initially not take into consideration the potential mitigating effects of our plans that have not been fully implemented as of the date the consolidated financial statements are issued.
In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including (1) uncertainty around the continued impact of the COVID-19 pandemic on the Company’s operations and consolidated financial results, (2) the $25 million of the Notes maturing on April 26, 2022, (3) recurring operating losses for fiscal periods through December 31, 2021, (4) the Company’s negative equity, and (5) the Company’s working capital limitations. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the 12-month period following the date the fiscal year 2021 consolidated financial statements are issued.
In performing the second step of this assessment, we are required to evaluate whether our plans to mitigate the conditions above alleviate the substantial doubt about our ability to meet our obligations as they become due within one year after the date that the consolidated financial statements are issued. Our future plans may potentially include, without limitation, one or more of the following: (1) securing incremental capital with the objective of potentially repurchasing some or all of the Senior Unsecured Notes at a discount to par, in the open market or otherwise, (2) securing equity or debt capital in private or public transactions, or (3) offering to exchange some or all of the Senior Unsecured Notes for debt, equity and/or other securities or other consideration, through privately negotiated transactions or otherwise. The constraints and requirements related to the Company’s current senior notes coupled with market conditions could create limitations with respect to such alternatives.
Management believes that the Company’s capital requirements will depend on many factors including the success of the Company’s business development efforts. Management also believes the Company may need to raise additional capital for working capital purposes There is no assurance that such financing will be available in the future. The conditions described
above raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
There is no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available through external sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material effect on the business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or they will not have a significant dilutive effect on the Company’s existing shareholders. In the absence of the successful execution of one or more of the Company’s previously mentioned mitigating actions, we have therefore concluded there is substantial doubt about our ability to continue as a going concern through or beyond March 2023.
The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our failure to continue as a going concern.
For more information on the Senior Unsecured Notes, see Note 14 and for more information relating to recent developments regarding the restructuring of the Senior Unsecured Notes, see Note 17.
17. Subsequent Events
On January 4, 2022, the Company filed a petition and summons for direction in the Cayman Court regarding the Scheme proposed by the Company related to the Note Restructuring. Pursuant to the summons for directions, the Company sought the Convening Order for the convening of the Scheme Meeting. At the Scheme Meeting, holders of 91.83% of the Notes in number and 99.34% par amount of those voting voted in favor of the Scheme and, on February 25, 2022, the Cayman Court sanctioned and approved the Scheme by entry of the Sanction Order. Effective as of February 28, 2022, the Company entered into an amendment of the RSA with the requisite majority of Supporting Noteholders to extend the date by which the Note Restructuring must be completed (so-called the Scheme Longstop Date under the RSA) to April 15, 2022.
In furtherance of the Cayman Proceeding and in connection with the Note Restructuring, on March 4, 2022, the Company filed the Recognition Petition, seeking that the Bankruptcy Court enter the Recognition and Enforcement Order. On March 4, 2022, the Bankruptcy Court entered an order, which, among other things, scheduled the Recognition Hearing. The Recognition Hearing was held on March 30, 2022, and, on the same day, the Bankruptcy Court entered the final and non-appealable Recognition and Enforcement Order, recognizing the Cayman Proceeding as the foreign main proceeding and enforcing the Scheme within the territorial jurisdiction of the United States, among other relief. Among other things, the Recognition and Enforcement Order provides that, pursuant to section 1145 of the Bankruptcy Code, once issued, the New Notes will be exempt from registration under Section 5 of the Securities Act, and any applicable state and local securities laws and freely transferable, subject to certain limitations under section 1145(b) of the Bankruptcy Code with respect to any New Notes issued to “underwriters” as defined in section 2(a)(11) of the Securities Act. The procurement of the Recognition and Enforcement Order was the last in-court step in the Note Restructuring. The Recognition and Enforcement Order is effective immediately and enforceable upon entry, authorizing the Company to take any action to implement and effectuate the Note Restructuring, including finalization of ancillary documents, among other things, in an effort to proceed toward closing the Note Restructuring in accordance with the Scheme and the RSA. For more information on the Note Restructuring and the RSA, see Note 14.
On March 25, 2022, the Company amended the Credit Agreement with the Lenders to increase the number of ordinary common shares the Company would be required to issue in connection with a Delayed Draw and the Lenders subsequently advanced $1 million of Delayed Draws under the Term Loans. For more information on the Credit Agreement and the Term Loans, see Note 14.
On March 30, 2022, the Compensation Committee of the Board of Directors of the Company approved the 2022 compensation for its directors, officers and senior managers. For more information, see “Part II, Item 9B, Other Information”.